NEWPORT BEACH – When it comes to describing Europe’s ever-worsening crisis, metaphors abound.For some, it is five minutes to midnight; for others, Europe is a car accelerating towards the edge of a cliff. For all, a perilous existential moment is increasingly close at hand.

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Optimists – fortunately, there remain a few, especially in Europe itself – believe that when the situation becomes really critical, political leaders will turn things around and put Europe back on the path of economic growth, job creation, and financial stability.But pessimists have been growing in number and influence. They see political dysfunction adding to financial turmoil, thereby amplifying the eurozone’s initial design flaws.

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Of course, who is ultimately proven correct is a function of eurozone governments’ willingness to make the difficult decisions that are required, and in a coordinated and timely fashion. But that is not the only determinant: governments must alsobe able to turn things around once the willingness to do so materializes. And here, the endless delays are making the challenges more daunting and the outcome more uncertain.

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Experienced observers remind us that crises, rather than vision, have tended to drive progress at critical stages of Europe’s historic integration – a multi-decadejourney driven by the desire to ensure long-term peace and prosperity in what previously had been one of the world’s most violent regions and the site of appalling human suffering.After all, the European Union (including the eurozone’s 17 members) remains a collective of nation-states with notable divergences in economic, financial, and social conditions.

.Cultural differences persist. Political cycles are far from synchronized. And too many regional governance mechanisms, with the important exception of the European Central Bank, lack sufficient influence, credibility, and, therefore, effectiveness.

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Left to its own devices, such a grouping is vulnerable to recurrent bickering, disruptive posturing, and disagreement over visions of the future. As a result, progress towards meaningful economic and political integration can be painfully slow during the good times. But all of this can change rapidly when a crisis looms, especially if it threatens the integrity of the European project.

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That is where the eurozone is today.A debt crisis that erupted in Greece, the eurozone’s outer periphery, has migrated with a vengeance towards the core, so much so that the survival of the eurozone itself is at stake.

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The more the policy response has lagged, the broader the set of questions about Europe’s future has become. Maintaining a 17-member monetary union is no longer a given. Talk of countries exiting, starting with Greece (the “Grexit”), is now rampant. And only hard-core idealists dismissaltogether the mounting risk of the eurozone’s total disintegration.

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Nonetheless, many veterans of the European integration project see a silver lining in the dark cloudsmassing over their creation. For them, only a crisis can stop politicians from just kicking various cans farther down the road and, instead, catalyze the policy initiatives – greater fiscal, banking, and political union – that, together with monetary union, would ensure that the eurozone rests on a stable and sustainable four-legged platform.

.But this view is not without its own risks. It assumes that, when push comes to shove, political leaders will indeed do what is necessary – the willingness question. It also presumes that they will have the capacity to do so – the ability question. And, over time, uncertainty concerning the latter question has risen to an uncomfortable level.

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Today’s eurozone is beset by an unprecedented degree of rejection – on economic, financial, political, and social grounds – by citizens in a growing number of countries. The longer this persists, the harder it will be for politicians to maintain control of their countries’ destinies and that of Europe’s collectiveenterprise.

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Private-sector activity is slowing, and it is nearing a standstill in the eurozone’s most vulnerable economy (Greece), where a bank run is in full swing.

.Elsewhere, too, depositors are beginning to transfer their savings to the strongest economy (Germany) and to safe havensbeyond (Switzerland and the United States).Weaker companies are shedding labor, while stronger firms are delaying investments in plant and equipment. And global investors continue to exit the eurozone in droves, shifting countries’ liabilities to taxpayers and the ECB’s balance sheet.

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No wonder that social unrest is evident in a growing number of countries.No wonder that fringe political movements are gaining traction throughout the eurozone.And no wonder that voters in almosttwo-thirds of eurozone countries have turned out the incumbents in their most recent elections.

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All of this serves to undermine the effectiveness of government policies – by reducing their credibility, clogging their channels of transmission to the economy, and making it difficult to offset the withdrawal of private-sector capital and spending. As a result, the market-based economic and financial systems that prevail in Europe, and that, not so long ago, were a source of significant strength, are losing their vibrancy.

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I, too, am fond of metaphors.During a trip to the continent last week, I heard one that captures very well the key dynamic in Europe today.

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The eurozone’s leaders are on a raft heading towards a life-threatening waterfall. The longer they wait, the more the raft gains speed. So the outcome no longer depends only on their willingness to cooperate in order to navigate the raft to safety. It also hinges on their ability to do so in the midst of natural forces that are increasingly difficult to control and overcome.

The message is clear.The current crisis might indeed eventually break eurozone leaders’ inherent resistance to compromise, collaboration, and common action. But the longer they bicker and dither, the greater the risk that what they gain in willingness will be lost to incapacity.

Mohamed A. El-Erian is CEO and co-Chief Investment Officer of the global investment compamy PIMCO, with approximately $1.4 trillion in assets under management. He previously worked at the International Monetary Fund and the Harvard Management Company, the entity that manages Harvard University's endowment. He was named one of Foreign Policy's Top 100 Global Thinkers in 2009, 2010, and 2011. His book When Markets Collide was the Financial Times/Goldman Sachs Book of the Year and was named a best book of 2008 by the Economist.

THE LAST FOUR YEARS have createdwhat economists call a “natural experiment” in economic policy. As a consequence of deregulation and globalization, Britain and the United States experienced the financial crisis of 2008 in much the same way. Large parts of the banking system collapsed and had to be rescued; the real economy went into a nosedive and had to be stimulated. But after 2010, the United States continued to stimulate its economy, while Britain chose the stonier path of austerity. .The British are no more wedded to the idea of fiscal austerity than are the Americans. The Victorian aim of an annual budgetary surplus (in order to allow for the repayment of debt) has long since vanished. Both countriesexperienced only occasional surpluses in the postwar yearsassociated with exceptional booms.The divergence of the two countries lies not in underlying attitudes but in political and institutional circumstances. .First, the British entered the crisis with a largely discreditedLabour government; the Americans with a largely discreditedRepublican administration.The political swing gave power to the traditional spenders in the United States and the traditional budget-cutters in Britain. Second, despite their small-government rhetoric, Republicans have actually always accepted, and indeed promoted, large deficits in the name of national security. Third, whereas the U.S. Treasury is simply an agency of government, the British Treasury has always assumed that it should control, not facilitate, government spending. .Finally, Britain, with European examples in mind, was concerned that foreign bondholders would take fright at the growth of the national debt—at least, this became the grand rationalization of austerity policy after the Greek crisis flared up in 2010. .

These factors help explain the differing fortunes of John Maynard Keynes in the twocountries.Homegrown in Britain, Keynesian policy was enthusiastically embraced by British governmentsimmediately after the war. In the United States, full-blooded Keynesianism started only with John F. Kennedy and Lyndon Johnson in the 1960s. The United States under Ronald Reagan and Britain under Margaret Thatcher abandonedofficial Keynesianism in the 1980s, but the taxcutting, defense-boosting commitments of the Republican Party kept unofficialKeynesianism alive in the United States long after it had been relinquished in Keynes’s own country. When George W. Bush, in announcing his stimulus measures of 2001, declared that budget deficits were justified by war, a recession, or a national emergency, Milton Friedman deplored the fact that “crude Keynesianism has risen from the dead.” Paradoxically, Keynesianism, unacknowledged and often reviled, chimed in with some constants in U.S. political lifebetter than it did in Britain, where it is still customary to payhomage to the master while ignoring his teaching..

SO WHAT DOES the experiment in economic policy tell us?At the start of the crisis, leading economic indicators in the United States and Britain were broadly similar: a government deficit of around 2.7 percent of gross domestic product (GDP), inflation of around 2.5 percent, and unemployment around 5 percent. The greatest differences were in GDP growth, with Britain growing at 3.5 percent in 2007 and the United States at 1.9 percent, and in the debt-to-GDP ratio, with Britain at 38 percent and the United States at 48 percent. In the autumn of 2008, both countries saw their financial and real economiesrapidly contract. By the third quarter2009, GDP had fallen by 5 percent in the United States and 5.9 percent in Britain, with unemployment rising sharply. .Both the Bush and Obama administrations and the British Labour Government subscribed to a Keynesian “savings-glut” interpretation of the crisis.According to this view, excessive saving in East Asia led to current account surpluses and created global deflationary pressure.

.Cheap money and expansionary fiscal policy in the West in the runup to the crisis were necessary responses.The resulting assetbubbles were not the fault of expansionary policy, but due to the fact that the money was channeled into speculation rather than investment. Once the bubble burst, savings rose and aggregate demand collapsed. .It followed that recovery required a boost to demand.As President Barack Obama put it: “It is expected that we are going to lose about a trillion dollarsworth of [private] demand thisyear [and] a trillion dollars of demand next year because of the contraction in the economy. So the reason that this [stimulus package] has to be big is to try to fill some of that lost demand.” Britain’s Labour government agreed. In 2008–2009, Prime Minister Gordon Brown pumped an extra $41 billion into the British economy; in February of 2009, Obama signed into law a $787 billionfiscal stimulus package. Insolvent banks were bailed out and the central banks of bothcountries started “quantitative easing”—effectively, printing money—in an effort to expand the supply of credit by forcing down bank lending rates..The activist policies had an immediate impact in both countries. A year after the onset of the crisis, GDP growth started to pick up. However, while stimulus measures preventedanother Great Depression, they helped expand government debt. In 2007, both the British and U.S. government deficits were 2.7 percent of GDP; in 2010, the figures were 9.9 percent and 10.5 percent, respectively.

.Chicago economist Robert Lucas has ruefully remarked that “everyone is a Keynesian in a foxhole.”But once stimulus policies removed the danger of prolonged depression, ideological conservatismreasserted itself. The fact that the bond markets started betting against highly indebted governments gave fiscal hawks an excuse to cut state spending under the guise of restoring “credibility” and “sustainability”; in Britain, these ostensible virtues became the basis of official policy after the general election of 2010.

.Britain’s Conservative spin doctors fueled the debt aversion with images from the streets of Athens and analogies between the private and public purse. Unless the state learned to live within its means, Britain would become “another Greece.” Austerity, not stimulus, was the road to recovery. .AS AUSTERITY POLICIES took hold in most of Europe, a Hayekian “money-glut” analysis of the origins of the slump replaced the Keynesian “savings-glut” one. According to Friedrich Hayek, slumps result from overly loose monetary policy. Excessive money-creation by the central bank makes it possible for banks to lend more than the public wants to save. Hayek called the credit financed investment that results from this “mal-investment.” Malinvestment manifested itself mainly in rapidly rising housing and asset prices. These prices were unsustainable, because they were based on debt, not genuine saving. Once the default rates on mortgages went up, the banks found that their AAArated assets had become junk. So they stopped lending..The collapse of the financial economy led to a sharp contraction of the real economy.In this view of things, the main requirement for recovery was to increase saving and liquidate the malinvestments. Fiscal stimulus would only delay a genuine recovery. .While the Obama administration continued to stimulate the U.S. economy—through the Recovery and Reinvestment Act of 2009—George Osborne, the new British Conservative chancellor, pursued a modified Hayekian experiment.The government set out to slash public expenditure by £99 billion—or 7 percent of GDP—per year by the 2015–2016 fiscal year and increasetaxes by another£29 billionper year. .Two yearslater, the score card is in.Since May 2010, when U.S. and British fiscal policy diverged, the U.S. economy has grown—albeit slowly. The British economy is currently contracting..Unemployment in the United States has gone down by 1.4 percentage points; in Britain, it has gone up by 0.2 percentage points. And despite keeping up stimulus measures, the Obama administration has been more successful in reducing the government deficit—by 2.5 percentage pointscompared with Osborne’s1.9 percentage points. .Earlier this year, Paul Krugmanwrote that “Britain . . . was supposed to be a showcase for ‘expansionary austerity,’ the notion that instead of increasinggovernment spending to fight recessions, you should slash spending instead—and that this would lead to faster economic growth.”But, as Krugman wrote, “it turns out that . . . Britain is doing worse this time than it did during the Great Depression.” .

For Keynesians, this is not surprising: By cutting its spending, the government is also cutting its income.Austerity policies have plunged most European economies (including Britain’s) into double-dip recessions. At last, opinion is starting to shift—but too slowly and too late to save the world from years of stagnation.

.Robert Skidelsky is John Maynard Keynes’s biographer and a member of the British House of Lords. His latest book, co-authored with his son Edward, is How Much Is Enough? Money and the Good Life.

France: Ready to jump ship

Roger, a senior expatriate executive working for an international company in Paris, is thinking seriously of taking a walk down David Cameron’s “red carpet”.

The UK prime minister last month riled France’s new Socialist government when he declared he would lay on a five-starwelcome for anyone moving to London to avoid the tax re­gime promised by President François Hollande – including his election pledge of a 75 per centmarginal rate on incomes above €1m a year.

.“I’m very happy in Paris.My wife and I love Paris. We came here by choice. But I’m reconsidering our situation given the changes in the pipeline,” says Roger, who declined to be identified by his real name.

.More than the 75 per cent rate, it is a move to higher wealth and inheritance taxes that worries him – and what he perceives as a cultural hostility to the rich.“The anti-wealth rhetoric is just not encouraging. I’d rather be in a country where I don’t have to deal with that,” he says.

It is not just expatriates who are concerned.Henri de Castries, head of Axa, the insurer, is one of France’s most respected business leaders. “I’ve listened to Mr Hollande. He wants to see more growth and lower unemployment. He wants to see business prospering. Wewant to see that, too,” he says.

“The question is how to achieve these goals?There is no example, in modern economic history, of a country that has succeeded in reducing its deficits by bringing taxes to a confiscatory level. On the contrary, it leads to a decline in activity, and an increase in the deficits.”

The anxieties of business reflect a broader question about the bold policy stance Mr Hollande has taken since ousting Nicolas Sarkozy in May. The leader of Europe’s second-biggest economy – the only leading EU stateheaded by a socialist – has made waves across the continent with his determination to shift the focus of the battle against the eurozone’s crippling sovereign debt crisis from German-led austerity to promoting growth.

At home, he has struck a new tone with his insistence on making the wealthy and big companies bear much of the brunt of fiscal adjustment.

The issue is whether his approach risks alienating the business community just at the moment when the country is in desperate need of investment and growth to rally a seriously weakened economy.

“France is not isolated from the rest of the world and Paris needs to be competitive,” says Guillaume Poitrinal, chief executive of Unibail-Rodamco, the European shopping mall group based in Paris.

“[Our] large companies provide business to small and medium-sized enterprises and are France’s best asset – they provide a large part of what’s left of economic growth today.

“I am sure that the government realises that if they are weakened vis a vis their competitors abroad, this would be a negative for employment, tax resources and economic growth.”

It was the banks that first felt the lash of Mr Hollande’s tongue when he declared that his “true adversary” was not Mr Sarkozy but “the world of finance”.The president, who has spent almost his entire career in the public sector or working for his party, once said: “I don’t like the rich.”

A few weeks after his attack on the bankers, he added the 75 per cent tax rate pledge, set to be introduced next year.On Wednesday, his government announced an increase in wealth and inheritance taxes, an extra tax on company dividends, a big rise in taxes on stock options, and surcharges on banks and petroleum stocks – worth a total of €7.2bn. Further measures, notably to align taxes on capital with income tax levels, are promised for next year.

Beyond taxes, a decree will limit the salaries of the chiefs of state-controlled companies such as SNCF railways, and nuclear energygroups EDF and Areva, to €450,000.For Henri Proglio of EDF, this will amount to a cut of nearly 85 per cent. Ministers are talking of restrictions on plant closures and tighter employment protection.

Strong appeals from Medef, the employers’ confederation, for relief from high social charges on employment have met the response that labour costs are not the primary cause of declining competitiveness.Alarmed by the trend at a timewhen the eurozone economy is in crisis and growth has stalled, Laurence Parisot, Medef boss, said last month: “We fear a systematic strangling.”

The chief finance officer of a big industrial company says the first question asked by investors – French and foreign – is now about the government’s policies and whether the tax rises will affectsenior management. But he says the main effect will be to drive awayowners of smaller businesses who fear not being able to cash in their wealth when they want to sell their companies. “It will be like the UK in the 1970s,” he says. “We will lose a generation and they won’t come back.”

Philippe Kenel, partner at Swiss-based tax lawyers Python & Peter, says that he relocated12 people from France to Switzerland up to the end of April – just before Mr Hollande was elected. “I did in four months what I usually do in a year.”

Roger says another danger is that foreign managers will no longer be drawn to the country.“In the pastfive to 10 years, French companies have been attracting more international talent. But who would want to come to Paris to run a company in the current environment?”

So far, the government has shown little sympathy for these concerns.“The liberal and financial model has ravaged our industry. It also pushed the world into the worst crisis since 1929. All this must change,” said Arnaud Montebourg, the minister in charge of industry, in an interview in Le Parisien newspaper this week.

The tax hikes are a central part of the government’s political and fiscal strategy. Mr Hollande insists it is only fair that the wealthy and big companies shoulder a large part of the fiscal burden. It is an important argument if he is to retain support, particularly within strongly anti-austerity Socialist ranks, for the public spending cuts and broader tax increases needed to haul down France’s debt, which is set to exceed90 per cent of gross domestic product this year.

The president has always been clear that the 75 per centtax rate, which he says will affectonly 3,000 households, is much more important as a symbol to deter excessive executive pay than as a revenue-raising measure.But James Johnston, private clientlawyer and head of the French group at London-based Bircham Dyson Bell, expects the increase to lead to the departure of wealthy French citizens to the UK, Switzerland and Belgium.

“France already has one of the highest tax rates for high-net-worth individuals.A 75 per centtop rate of income tax would bring the total theoretical marginal rate of tax, with everything added in, up to90 per cent. This is a rate that the rest of the world is not resorting to.”

François Pérol, chairman and chief of BPCE, one of France’s largest banks, and a former senior financial adviser to Mr Sarkozy, says: “We need to see what the details arebefore concluding it’s a catastrophe.If it’s a temporary measure, it will aim to create a consensus around other, more difficult reforms. If it’s structural, then I think there will be an impact on competitiveness because it will discourage people, such as young entrepreneurs, from setting up their own businesses.”

Government insiders insist Mr Hollande’s administration is far from the hotbed of radicals sometimes portrayed.They pointout that plans to separate retail from speculative investment banking are no more than the Conservative-led UK government intends to introduce. A much-anticipated rise in the minimum wage was limited to just 0.6 percentage points above inflation, to the consternation of trade unions, taking it to €9.40.

Though Mr Hollande has avoidedbeing seen in public with business leaders, senior figures known to be sympathetic to the government include Gérard Mestrallet, chief executive of GDF Suez, the big energy utility; Matthieu Pigasse, head of the French operations of Lazard bank; and Pierre Bergé, co-founder of fashion label Yves St Laurent.One of the president’s closest aides in the Elysée palace is Emmanuel Macron, a former Rothschild banker, who before the election was an enthusiastic adviser, particularly on financial issues.

Setting out his government’s programme to parliament on Tuesday, prime minister Jean-Marc Ayrault, said he recognised the importance of “creators, innovators and entrepreneurs”.He said: “I value business leaders and I know them. I salute their contribution to our economy. I do not confuse them with those who get golden parachutes or unscrupulous speculators.”

The administration’s industrial policy is focused on fostering small and medium-sized businesses, innovation, research and skills.It is introducing lower corporate tax rates for smaller companies and setting up savings vehicles to funnel private savings into industrial investment. Next year it launches a public investment bank with a brief to fund new and small businesses.

Despite the fears of Medef and others, Alexia de Monterno of the Montaigne institute, a Paris-based think-tank, says there are signs the government is prepared to address industry’s big concern about labour costs.As for its stress on “non-cost” causes of flagging competitiveness, she acknowledges: “There has been a lack of investment and innovation, which has been a particular issue in the car industry, and there is a problem of vocational training, with a big gap between skillsavailable and those needed by industry.”

With a solid majority in parliament to underpin his five-yearterm, Mr Hollande is not about to make a lurch to appease rumblings of discontent from the business world. Tensions between the twosides are likely to continue. Disagreement looms over a spate of industrial closures and redundanciessome large companies have begun to unveil. They are under government pressure to limit the damage.

But, while some executives may head for Zurich or Mr Cameron’s red carpet, the biggest groupsseem likely to hunker down, albeit warily. “We want this business to re­main competitive, and therefore we will watch very carefully all the steps that are going to be taken and we will behave accordingly,” says Mr De Castries.

Mr Poitrinal of Unibail-Rodamco commented: “At this stage, we have no plan to move our headquarters outside of France. And we hope that France will remain an attractive place in which to invest and to recruit and remunerate top people.”

The argument between French business and the new Socialist government about taxes and regulation reflects a shared concern over the serious erosion of France’s competitive edge during the past decade, which is compounding the effects of the current economic slowdown.

The signs are evident in a series of industrial redundancy programmes now emerging.

The government is braced for what trade unions predict will be the loss of some 45,000jobs during the next few months, which comes on top of the disappearance of 350,000manufacturing jobs over the pastfive years.

PSA Peugeot Citroën, which has struggled to match competition especially from German rivals, is one of the highest profilecompanies in trouble, with its unions predicting up to 10,000job cuts. Last month Air France announced a restructuring plan to shed5,000jobs as it battles to overcome non-fuel running costs that are on average30 per centhigher than those of its competitors.

The starkest illustration of France’s competitive problem lies in its trade deficit, which hit a record€70bnlast year, while Germany ran a surplus of some€150bn..The International Monetary Fund says France lost about 2.5 percentage points of world export market share in the pastdecade – more severe than its peers.In the euro area it lost about 1.5 percentage points in the latter half of the decade, compared with a 0.25 percentage pointloss for Germany. Industry’s share of gross domestic product shrank in the decade to 2010 to 16 per cent from 22 per cent.The government stresses the lack of investment, innovation and skills as core issues, but French business blames high labour costs for much of the problem.A big chunk of the country’s largesocial welfare programmes are financed by charges on employers and employees.A recent EuropeanCommission report said the implicit tax rate on French labour was 41 per cent, one of the highest in the EU.Philippe Varin, Peugeot’s chief executive, has estimated that in 10 years the hourly cost of a worker has risen31 per cent in France, compared with just 19 per cent in Germany.Fitch, the rating agency, commented in May: “The room for manoeuvre for further increasing the tax burden is limited by the need to strengthen France’s international competitiveness.”Oneeffect has been a sharp decline in profitability, by 50 per cent since 2000 for industrialcompanies, according to the GFI, an industrial sector association.French companies tend to absorb slowdowns by cutting profitmargins because restrictions on shedding labour and high charges on employment limit their ability to adjust costs.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.